Mutual Funds are very cost effective investment instruments. Benefit of Diversification, Rupee Cost Averaging, Professional Management and High Liquidity ensures that your money is invested for the right objective. The biggest advantage of this vehicle is low investment requirement which makes it ideal for small investors who wants to build an investment portfolio for realizing their dreams.
Mutual Funds have been in India for almost more than 15 years and so the schemes dedicated to equities. However, in spite of many benefits it offers, creating an investing portfolio through equity MFs has always been a daunting task for investors. To analyze so many schemes on various parameters requires time and expertise. Moreover, to decide which asset classes can match your requirement, you need clerity on your financial goals.
Here are some factors which one should consider while searching the right MF scheme for his/her objective:
1. Know Your Requirement: Most of us invest in MF scheme without an objective. The best rationale I have heard is high returns. This a very vague expectation from any asset class as high returns do not have any limitations. Even a 25% return on your investment is not enough if your neighbor portfolio is able to earn higher. Contrary to this if you can meet your objective with 15% return; you will be more than satisfied and will avoid taking any further risk. Similarly, whether you are retired and need regular income or young vying for capital appreciation decides what type of funds to select. Thus, identifying your financial objective is very important before you can even start searching for a MF scheme.
2. Know Your Risk Profile: Your risk tolerance determines how much exposure you are willing to take in any asset class. But, many a times individuals burn their fingers due to this unawareness. If you are not comfortable with high volatility of equity markets then investing entire savings in this asset class will be risky. Although there are other factors which decide your asset allocation, knowing your risk profile helps in keeping your cool if markets turns opposite to your perception.
3. Invest With Time Horizon: Time Horizon is one of the key factors in selecting any asset class. Although identifying your objectives does nearly estimates your time horizon of investing. In mutual funds you have various categories of schemes which you can select based on this factor. For e,g. if you have only few weeks for your goal you have liquid funds, while for long term goals, 2-3 year or more, you have MIPs, Hybrid Funds and long term debt funds to choose from.
4. Look for Consistency: In any form of investment, consistency plays an important role in achieving your goals. Your investment does not necessarily be a top performer but should be consistent. In equity mutual funds there are many top performers who lose their sheen in next few years of their top rankings. Large Cap Equity Oriented Schemes are known to be consistent performers due to nature of their investment. The returns may not be very high but you can be sure of some downside protection during bear markets. Even in this category you have schemes with various investment objectives and so you have to select the right one.
Large Cap Equity Oriented Schemes
|
Scheme
|
Inception
|
Perfromance (%) Annualized
|
Expenses
|
||
|
3 yr
|
5 Yr
|
Since Inception
|
%
|
||
|
Birla Sun Life Frontline Equity Fund
|
2003
|
24.49
|
10.59
|
24.53
|
1.87
|
|
DSP Black Rock Top 100 Equity Fund
|
2003
|
22.74
|
12.21
|
28.68
|
1.86
|
|
Franklin India Bluechip Fund
|
2003
|
26.79
|
11.41
|
23.83
|
1.84
|
|
HDFC Equity Fund
|
1994
|
32.95
|
12.50
|
20.73
|
1.79
|
|
HDFC Top 200 Fund
|
1996
|
28.21
|
13.71
|
22.96
|
1.78
|
|
ICICI Prudential Focused Bluechip Equity Fund
|
2008
|
27.98
|
–
|
13.18
|
1.94
|
|
Reliance Regular Savings Fund-Equity
|
2005
|
26.07
|
13.41
|
15.91
|
1.84
|
Source: Valueresearch
5. Keep the Sectoral Exposure Minimum: I have come across so many portfolios where sectoral schemes have been the highest contributor in the portfolio downside. The primary reason is the expectation and unawareness on the sector performance. Sector funds rely heavily on the development in a particular sector like Infrastructure, power, energy etc. where external factors like government policies play a very important role. The sector may lose its importance very early if there is no change taking place. For e.g. Last three years have shown how a sector like infrastructure can be out of preference if government policies are not creating much headways.. Hence restrict sectoral exposure in your portfolio. Most planners advice maximum of 5% but if one is very sure of the performance, can invest up to 10% of the total portfolio.
6. Include Hybrid Funds– Balanced funds are very wise option especially for first time investors. These funds invest 65-70% in equity and rest in debt giving a meaningful allocation to your savings. The downside protection and good performance track record make these funds ideal for having a judicious mix of equity & debt. Moreover, these funds give consistency to your entire portfolio.
Balanced Fund Performance
|
Scheme
|
Inception
|
Performance (%) Annualized
|
||
|
3 yr
|
5 yr
|
Since Inception
|
||
|
Birla Sun Life 95
|
1995
|
24.59
|
11.98
|
22.31
|
|
Canara Robecco Balanced
|
1993
|
24.70
|
11.74
|
11.65
|
|
DSPBR Balanced
|
1999
|
21.38
|
11.67
|
15.61
|
|
HDFC Balanced
|
2000
|
30.27
|
14.68
|
16.40
|
|
HDFC Prudence
|
1994
|
32.45
|
14.08
|
20.25
|
|
Reliance Regular Savings Balanced
|
2005
|
25.82
|
14.15
|
12.06
|
Source: Valueresearch
There are many other factors apart from mentioned above which play a role in selection of right MF scheme. However, creating an investment portfolio requires identifying your goals first. The schemes you invest has some objectives laid down which should match your specific need. Any deviation could lead to wrong selection jeopardizing the related performance of your goal achievement.
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This and All the other Articles/Videos on this blog are for general Information and educational purposes and not to be taken as an Investment Advice. Any Action taken by Readers on their Personal finances after reading our articles or listening to our videos will be purely at his/her own risk, with no responsibility on the Writer and the Investment Adviser. Registration Granted by SEBI, membership of BASL and Certification from National Institute of Securities Markets (NISM) in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
Excellent Article sir, really liked it…Would appreciate if u publish article on long term direct equity investing…
Hi Harshit,
You can read more on equities on my blog.
For direct equities i do not have expertise to research and hence i restrict myself to mutual Funds.I feel for small investors like you and me Mutual Funds is the best route.
Thanks Jitendra !!